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Rising Preference for Online and Mobile Banking Is Making It Harder for Smaller Banks to Compete

Date: June 19, 2014

Karen Augustine

Manager, Primary Data Services

“The number of small banks—those under $10 billion in assets—declined 24% between 2000 and 2013, according to a report from the Mercatus Center at George Mason University. Almost 2,000 small banks disappeared during that time period. While community banks' share of domestic deposits was nearly cut in half, the five largest national banks more than doubled their market share. The five largest banks now hold 44% of U.S. banking assets and 40% of domestic deposits—up from 23.5% and 19.5%, respectively, in early 2000,” notes Kevin Tynan, SVP of Marketing at Liberty Bank for Savings, a community bank in Chicago, in his June 4 article in American Banker. Although big banks have historically trailed small banks in customer service, the gap is narrowing as a result of customer satisfaction with online and mobile banking. Good customer service in the branch may no longer be enough to differentiate community banks and win customers, Tynan asserts. Smaller banks that rely on personal service to distinguish themselves and don’t apply the resources necessary to improve their customers’ digital banking experience are likely to find it more difficult to compete against the larger banks’ more sophisticated online, mobile, and tablet banking offerings.

Consumers are beginning to rely more heavily on online banking as their digital “branch” or banking source for managing their accounts and for customer service, Mercator Advisory Group survey research finds. Online and mobile banking are the fastest growing methods used by consumers to communicate with their financial institutions. Remarkably, 1 in 4 smartphone owners deposit checks using their mobile phone, twice the percentage of respondents who reported doing so a year earlier in 2012, according to primary data from Mercator Advisory Group’s CustomerMonitor Survey Series presented in our latest Insight Report, Online Banking: A Shift to Mobile Platforms. Online banking is pervasive in the United States as 84% of U.S. consumers now perform banking activities to manage their account information using their home computers or mobile devices and 69% use only their computers to do so. In fact, consumers who perform banking activities using their mobile phones are nearly twice as likely as average to have switched their primary financial institution within the two years prior to the survey.

Online banking is becoming critical and consumers’ preferred source for learning about new financial products and services. Mercator Advisory Group’s survey finds that over half (53%) of consumers prefer to be notified electronically, mostly by email (36%) and only half as many prefer to be notified in person (26%).

Consumers are taking notice of banks’ online functionality. For example, some consumers, especially young adults noted their frustration with the online account opening process at their primary financial institutions with lower than average satisfaction. For more information on the growth of online banking and online account opening experiences, please refer to Mercator Advisory Group’s CMSS Insight Report, Online Banking: A Shift to Mobile Platforms, based on an online survey of 3,000 U.S. adults conducted in November 2013 to be reflective of the U.S. Bureau of the Census demographic profile accessible by CustomerMonitor Survey Series members.

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